What is a 'Set-Off Clause'

A set-off clause is a legal clause that gives a lender the authority to seize a debtor's deposits when they default on a loan. A set-off clause can also refer to a settlement of mutual debt between a creditor and a debtor through offsetting transaction claims. This allows creditors to collect a greater amount than they usually could under bankruptcy proceedings.

BREAKING DOWN 'Set-Off Clause'

If a debtor is unable to meet an obligation to his or her bank, the bank can seize the customer's current deposit. Set-off provisions are not limited to loans between banks and their customers, but are also widely used in other industries, such as construction.

The Truth in Lending Act prohibits set-off clauses from applying to credit card transactions; this protects consumers who decline to pay for defective merchandise.

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